- PSBs improved NIMs despite falling interest rates by trimming costly bulk deposits.
- UCO Bank led the pack with an 18‑basis‑point jump; Bank of India and Union Bank followed.
- Higher‑yielding retail, agriculture and MSME (RAM) advances are becoming the profit engine.
- Sector‑wide margin pressure may reverse if the RBI eases rates further or asset quality deteriorates.
- Investors can position for upside by targeting banks with disciplined fund‑cost management.
You missed the quiet margin‑boosting shift in India’s public banks, and that could cost you.
Why PSBs' NIM Improvement Defies the Rate‑Cut Drag
Net Interest Margin (NIM) measures the spread between the interest a bank earns on loans and the cost of its funds. In a falling‑rate environment, NIMs usually compress because loan yields drop faster than funding costs. Yet, seven of eight reporting public sector banks (PSBs) either held steady or widened their NIMs in Q3 2025‑26.
Two tactics drove the upside:
- Shedding high‑cost bulk deposits: Large, wholesale deposits typically carry lower interest rates for the bank but are expensive to replace when rates fall. By encouraging these deposits to mature, banks reduced their overall cost of funds.
- Reallocating to higher‑yielding RAM advances: Retail, agriculture and MSME loans command higher spreads and are less sensitive to policy rate moves.
Bank‑by‑Bank Breakdown of the Margin Play
UCO Bank posted the sharpest quarter‑on‑quarter NIM lift – 18 basis points (0.18 %). The Kolkata‑based lender trimmed exposure to low‑margin government‑owned borrowers and aggressively priced its bulk deposits lower.
Bank of India (BoI) added 16 basis points, taking its NIM to 2.57 % from 2.41 % in September. CEO Rajneesh Karnatak highlighted the dual approach of shedding low‑margin corporate loans and expanding the high‑yield RAM book.
Union Bank of India reduced bulk deposits by roughly ₹33,000 crore, cutting the bulk‑deposit share from 23 % to 21 % of total deposits. That move lifted its NIM to 2.76 % from 2.67 %.
Indian Bank maintained a 39 % share of low‑cost current and savings accounts, while also pruning low‑yielding advances from top‑rated corporates. The strategy kept its NIM flat amid a rate‑cut cycle.
Sector Trends: What the Rest of Indian Banking Is Doing
Private lenders such as HDFC Bank and Kotak Mahindra have long relied on a retail‑heavy loan book, giving them a natural buffer against rate cuts. The PSBs are now mimicking that model, a shift that could compress the traditional spread advantage private banks enjoy.
Meanwhile, the Reserve Bank of India (RBI) has trimmed the repo rate three times this year, pushing benchmark yields lower. If the RBI continues easing, banks that have already lowered their funding costs will be better positioned to preserve margins.
Historical Context: Have PSBs Done This Before?
During the 2013‑14 monetary tightening cycle, several PSBs managed to grow NIMs by cutting expensive term deposits and focusing on micro‑finance and SME lending. Those banks subsequently outperformed the broader index during the 2016‑18 slowdown, rewarding disciplined investors.
The current episode mirrors that playbook, suggesting a repeatable pattern: when policy rates fall, proactive fund‑cost management can offset yield compression.
Competitive Landscape: How Are Peers Reacting?
Tata Capital and Adani Capital, though not PSBs, have accelerated their retail‑loan origination, betting on higher spreads. Their aggressive pricing has forced traditional banks to tighten deposit rates to stay competitive.
Among PSBs, those lagging in bulk‑deposit reduction—such as Punjab National Bank—are seeing NIMs dip toward 2.30 %, highlighting the competitive advantage of swift fund‑cost pruning.
Investor Playbook: Bull vs. Bear Cases
Bull Case
- Continued reduction of bulk deposits drives funding costs down faster than loan yields fall.
- RAM advances expand, delivering higher spreads and better asset‑quality metrics.
- Regulatory capital relief (e.g., Basel‑III transitional buffers) improves profitability ratios.
- Market pricing rewards NIM‑improving PSBs with higher P/E multiples relative to peers.
Bear Case
- Further RBI rate cuts compress loan yields, eroding the NIM buffer.
- Rapid shedding of bulk deposits could trigger liquidity strain if not replaced by stable retail funding.
- Rising non‑performing assets (NPAs) in the corporate segment could offset margin gains.
- Political pressure to keep loan rates low for priority sectors may limit spread expansion.
For investors, the sweet spot lies in banks that have already demonstrably lowered their bulk‑deposit ratios while showing steady growth in RAM advances. Consider adding UCO Bank, Bank of India, and Union Bank to a diversified banking basket, but hedge with exposure to private lenders that already enjoy a retail‑heavy mix.
Key Takeaways for Your Portfolio
- Margin‑improving PSBs are becoming the hidden winners in a low‑rate environment.
- Watch bulk‑deposit percentages—declining trends signal proactive fund‑cost management.
- Higher‑yielding RAM loan growth is a leading indicator of future NIM resilience.
- Balance exposure between PSBs that have executed the strategy and private banks with inherent retail focus.